Ken Henry and the Keynesian delusion

Posted on by
6

Former Head of Australia’s Treasury department, Ken Henry, was interview by Chris Uhlmann on the ABC’s 7.30 recently.  His remarks convey the delusional nature of modern day Keynesians – the idea that massive government intervention can ‘save’ the economy.

When asked about the 2008 financial crisis, Henry responded that “as secretary of the treasury I was not going to stand on the sideline… there was no point in going in soft… the quicker you do it (intervene) the better… don’t wait until you see the whites of the eyes.  Do it.  Do it early.”

The government did it alright.  Over $50 billion was thrown out the door in order to stimulate the economy.  And for that immense chunk of cash we got the disastrous home insulation (pink-batts) scheme, the wasteful schools building program and the cash handouts.

Asked about the potential waste in all this furious spending, Henry responded that with “fiscal stimulus the most important thing is to get the money out the door. But how the money is, whether the money is in some sense wasted because there’s overcharging or whatever, of course it’s an important point but from a macroeconomic perspective it’s very much second order, maybe even third order”.

Got that?  – the macro-Keynesian guys don’t care about waste.  It’s all about STIMULUS.  In the Keynesian paradigm you really can dig holes and fill them up again in order to get economic growth.

Out here in the real world wasting money to get “economic growth” is absurd.  Sure, sure – we can blow lots of cash so the GDP numbers show growth from one quarter to the next, just like if I maxed the credit card for a while to ‘stimulate’ the amount of economic activity I generate by “investing in” a TV, a new car and a holiday.  But if that growth in “economic activity” is wasteful then we won’t get economic growth for long and we still have to pay it all back with our future incomes, generated from real economic activity.  In the highly theoretical world of the Keynesians, all this doesn’t matter.  But it does matter in the real world.

Let’s imagine that all that government spending had been put into activities that enhanced the productivity of the nation.  These days, fifty billion bucks will still buy a national highway system, lots of high-speed trains and, say, a couple new major-city airports.

That shopping list might have taken a few years to deliver, so perhaps there would have been a slight fall in economic activity in 2008 without the cash dump.  But so what?  Instead of blowing $50 bill on nothing, we could have had some impressive new kit that would add to Australia’s productive capacity for years to come.  But, nah – Treasury and geniuses like Ken Henry reckon it’s better to manipulate the quarterly GDP numbers by blowing the national savings on “stimulus” instead of investing in some long term, nation building projects.

It’s no wonder Australia’s productivity numbers have stagnated.  If our savings are blown on unproductive ventures like school halls, pink-batts and free cash handouts then we can’t spend them on more efficient roads, rail and aviation facilities (just to start with).  But I suppose no one ever accused the big government Keynesians of factoring common sense into their models.

The Western debt crisis is about the long term misallocation of resources

Posted on by
2

I know that headline is a mouthful, but stay with me for a minute.

Europe faces insolvency and a collapse of its financial system.  The US has racked up over 30% of GDP in debt in the past few years alone.  This kind of borrowing cannot go on.  In fact, it’s already stopped.

I recently mentioned that the US had 60% of its annual debt issuance funded by printing money.  The European Central Bank’s LTRO program basically saw them give money to banks so they could in turn buy Eurozone government debt.

This isn’t borrowing to cover the bills.  This is debasing the currency to pretend we are meeting our liabilities.

But it begs the question of how we got to this point.  What happened such that we’re now in a la-la-land of world finance?

Put simply, governments have made two long term and fundamentally incompatible sets of promises.

On the one hand they have made promises to pensioners, the unemployed, retirees and sick people as well as their usual claims from defense, justice and simply running the place.

On the other hand, in order to fund all this and keep taxes from being punitive, they have borrowed the savings of a far larger set of people to balance the books.

The spending promises would one day either need to shrink or one or both sets of promises would have to be broken.

But they didn’t shrink.  They kept growing, and now not even taxation AND borrowing can cover the shortfall.

Governments cannot repay their debts, and they certainly can’t borrow any more – the markets have dried up as they have realized that they probably wont get their money back.  As a result, only by printing money can the shortfall be bridged.

Beyond the lunacy of the printing presses whirring away, one has to ask where this leaves us.  What comes next?

I have no idea how the coming financial crisis will play out and I’d be a trillionaire if I could pick the timing.  But one thing I do know is that a lot of the West’s savings are gone.  Over a sustained period of time they have been misallocated to uneconomic, non income-generating endeavors (Greeks retiring at 51, for example).  Instead of being spent on productivity enhancing infrastructure or private enterprises that provide an income, they have been handed over to cover the ongoing expenses of bloated big-government.

Your bank account may look healthy now.  But your cash has been handed over to big government and spent, so it’s really only a number on a screen.  They can’t pay you back – not all of it.  Not over the long term.  They will either default and your balance goes down, or they’ll print money to inflate out of it, so that every dollar now will be worth, say, $0.50 cents in a couple years.

Sure, sure, this doesn’t apply to everyone – Australians and Canadians can sit tight, and maybe some non-Eurozone Europeans.

But the readjustment back to reality is coming.  One way or other that debt must be wiped away.  It simply can’t be repaid.  So take a good look at your bank balance.  Get into inflation-proof investments if you can.  And kiss goodbye to a lot of cool stuff that you were saving for.

 

A chink in the armour at The Sydney Morning Herald

Posted on by
1

“Please note that it is NOT smoke coming out of the stacks, it is steam” … Bayswater Power Station in NSW. Photo: Jonathan Carroll

Slowly but surely reality is seeping into the global warming debate.  The media that have swallowed the global warming scare hook, line and sinker are starting to shift their position as their readers are becoming more skeptical.

This week the Sydney Morning Herald reported that it would no longer mislabel pictures of power stations venting steam.  Previously it had carelessly labeled such pictures as “smoke” and pollution, when in fact all we see is water vapor coming out of the cooling towers.

But more interesting is this  — the Herald’s “readers editor” says the following:

“Many readers feel the Herald and The Sun-Herald do not publish enough alternative opinions and stories on climate change and global warming, that they have formed an opinion and will stick with it. If you read the Herald’s editorials, there appears little doubt that it has accepted the scientific consensus on the effects of carbon pollution on climate: there has been a gradual warming of the planet. The Sun-Herald leans that way, too. So when those who question the climate-change science see what they consider examples of the ”old trick” referred to by the reader [mislabeled photos], they feel their concerns are justified.

Ignore the “carbon pollution” rubbish and the fact that “there has been a gradual warming of the planet” is not proof that humans are the cause of this warming.  What’s interesting is that the Herald now accepts that many of its readers have become climate skeptics.  This despite years of climate alarmism from the Herald and its sister papers in the Fairfax stable (The Age and Financial Review).

One might think that given this revelation about the climate skepticism of its readers, Fairfax might mix up its offering a bit and provide its customers with some articles in tune with their skeptical beliefs.  No sign of any such radical transformation at Fairfax though – which may explain the continued slump in its share price, currently trading at $0.71 cents, down from over $4 back in 2008.

Still, correctly labeling such pictures is a start.  Who knows, maybe a future editorial will question the ‘settled science’.

 

Comments reactivated

Posted on by

My apologies for anyone who has tried to comment recently.  I had the setting on “login”, not realising you needed a WordPress login to comment.

This was in an attempt to stop all the ridiculous spam.  I have now enabled comments for anyone who has previously been approved.  If your comment doesn’t appear immediately it may be that I need to approve it.  I’ll be checking-in daily over Easter.

James Delingpole debates climate science on the BBC

Gallery

Posted on by
James-Delingpole_140

This gallery contains 1 photo.

James Delingpole was recently discussing global warming and his new book Watermelons on the BBC. Richard Bacon, the poor, clueless presenter, sounds like he’s never had a reasoned debate about the topic before.  He throws out various bogus statistics (97% of scientists agree) … Continue reading →